An electronically created payment is a new
retail payment practice in which a merchant
takes payment instructions for goods and services and places them
in an electronic template that creates an electronic file for
processing through the check clearing networks. Unlike
traditional checks or RCCs, electronically created payment orders
do not begin with a paper item. However, they are similar to
RCCs in that they are typically initiated with Internet or
telephone instructions from the consumer and bear no direct
evidence of the customer's authorization. Because these
transactions are not originally captured from paper check items,
the laws and regulations pertaining to check collection do not
apply.

Ordinarily, electronic debits that a consumer uses to acquire
goods or services are cleared through the ACH network, which
includes a transaction code that clearly indicates the nature and
source of the transaction. When a financial institution
permits the creation of electronic payment orders, substantial
risk-management oversight for unauthorized returns and other
unlawful activity is lost because the check-clearing networks do
not provide the level of technological and organizational controls
of those in the ACH network. This lack of systemized
monitoring of the electronically created payment orders increases
the susceptibility to fraud by Web-based vendors and
telemarketers.

The Federal Reserve Banks handle electronic check images only if
they were created from an original paper check. On June 15,
2008, the Federal Reserve Banks revised Federal Reserve Bank
Operating Circular 3 (Circular 3) See
www.frbservices.org/files/regulations/pdf/operating_circular_3.pdf
for Operating Circular No. 3: Collection of Cash Items and Returned
Checks, effective July 15, 2008. to clarify that a
depository institution that sends an electronic check file to the
Reserve Banks is liable for the legitimacy of the items in that
file. Reserve Banks only accept applicable liability and
offer certain warranties for Check 21 transactions that begin with
an original paper check item. Because electronically created
payment orders generally are indistinguishable from electronic
images of paper checks, collecting banks, such as the Reserve
Banks, may not be able to avoid accepting the electronically
created payment orders. However, pursuant to the revised
Circular 3, the bank that sends the item to the Reserve Bank
ultimately assumes liabilities and provides warranties for its
legitimacy.